Question

Economists' estimates of price elasticities can differ​ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and​ Prevention:

​"A 10 percent increase in the price of cigarettes reduces consumption by 3 to 5​ percent."
Given this​ information, compute the range of price elasticity of demand for cigarettes.
​
Source: Shaila Dewan, "States Look at Tobacco to Balance the Budget," New York Times, March 20, 2000

According to the​ article, the price elasticity of demand for cigarettes ranges from ____ ​(the lowest end of the range in absolute​ value) to ____ ​(Enter your responses as real numbers rounded to two decimal​ places.)
Explain whether the demand for cigarettes is​ elastic, inelastic, or unit elastic.
The price elasticities in this range
A. are inelastic during a portion of the range and elastic during a portion of the range.
B. are inelastic because they are less than zero.
C. are inelastic because they are less than one​ (in absolute​ value).
D. are unit−elastic because they are less than zero.
E. are unit−elastic because they are less than one​ (in absolute​ value).

If cigarette manufacturers raise​ prices, will their revenue increase or​ decrease? Briefly explain.
If manufacturers raise​ prices, then their revenue will
A. increase because price will increase.
B. remain unchanged because quantity will decrease as price increases.
C. increase because the percentage increase in price will be larger than the percentage decrease in quantity.
D. decrease because quantity will decrease.
E. decrease because the percentage increase in price will be larger than the percentage decrease in quantity.

Answer 1

The price elasticity of demand for cigarettes ranges from 0.3 to 0.5, indicating that the demand is inelastic. If cigarette manufacturers increase prices, their revenue will increase due to the inelastic nature of demand.

Step-by-step explanation:

The price elasticity of demand for cigarettes ranges from 0.3 (the lowest end of the range in absolute value) to 0.5 (rounded to two decimal places). The demand for cigarettes is considered inelastic because the price elasticities in this range are less than one (in absolute value). If cigarette manufacturers raise prices, their revenue will increase. This is because the demand for cigarettes is inelastic, meaning consumers are less responsive to price changes, so an increase in price leads to a smaller decrease in quantity demanded compared to the increase in price.